Fed’s Bowman: Fed to shift towards proactive ahead trying strategy

Fed’s Bowman – who voted for a 25 basis point cut at the most recent meeting – is out saying it is now time for the Fed to act decisively (and more):

• Recent data show a materially more fragile labor market, inflation ex-tariffs hovering not far above target

• Time for FOMC to act decisively and proactively to address decreasing labor market dynamism, emerging signs of fragility

• Recent data, including benchmark payroll revisions, show we are at serious risk of already being behind the curve

• Should these conditions continue, concerned we will need to adjust policy at faster pace and to a larger degree going forward

• Shift is appropriate as forecasters widely expect inflation to significantly decline next year

• Expect inflation to return to target after one-time adjustment from tariffs

• Appropriate to look through one-time effects of tariffs

• Economy may be experiencing extended productivity surge from recent tech advances

• Inflexible, dogmatic view of data dependence gives backward-looking view of economy, guarantees we remain behind the curve

• Fed should consider shifting focus from overweighting latest data points to a proactive forward-looking approach

• Prefer smallest balance sheet possible with reserves closer to scarce than ample

• Active balance sheet management would give more timely indication of market stress, market-function issues

• Lower level of reserves might encourage banks to be more active in reserve positions and liquidity-risk management

• Smaller balance sheet as percent of GDP gives Fed more optionality to respond to future shocks

• Strongly support holding only Treasuries

• Look forward to discussion of sales of MBS; passive runoff won’t allow return to Treasury-only holdings in credible time frame

• Balance sheet tilted toward more shorter-dated securities would offer more flexibility

• Emergency lending facilities should be limited to single-purpose use in emergencies and not made permanent

• Reforming enhanced supplementary leverage ratio would address some of the problems permanent facilities like standing repo were designed to alleviate

• See slower population growth, aging population as more prominent factors in pulling down neutral rate

Bowman is pushing for a more proactive, flexible Fed — less bound to rigid data dependence, more willing to act preemptively, and more aggressive in reshaping the balance sheet and reserves framework. That contrasts with the Fed’s usual preference for incremental, reactive policy and passive balance sheet management.

Yesterday, Trump said that Powell should cut rates to 2%.